A tough decision
Selling your company’s property can be a painful decision, one some business owners might associate with failure.
In the case of a family business, your parents or grandparents may have purchased the building decades ago, and perhaps you planned to pass it on to your own children. Selling it could feel as if you’re letting down your descendents and your ancestors all at the same time.
Leasing a property back can also be uncomfortable for bosses who have grown used to owning their property. Submitting to new lease terms and a landlord’s whims aren’t changes long-time business owners are necessarily lining up to do.
As an owner, though, you’re tasked with making sacrifices for the sake of your company’s long-term health. Any battles that take place between your emotions and a pressing need for cash flow should probably be short.
“I do think that there would be hesitancy at first, but what drives these kinds of transactions more often than not is that need for cash,” says Howard Wasserman, partner in the tax division of Segal LLP advisory firm in Toronto. “Yes, you have to pay tax on [the proceeds], and you’re now, in essence, a tenant. But just from a cash flow perspective, you're much better off.”
Making the switch
If selling your building and renting it back will solve your cash crunch and not hinder the growth and stability of your business, experts advise that it’s worth pondering.
But there are some issues to watch for during the sale and leasing.
On the sale
Selling a property out of need isn’t always a great position to be in, even at a time when demand for certain commercial properties is strong. Even if you’re the savviest of business owners, trying to sell your building yourself isn’t advisable.
To avoid receiving less than fair market value for your property, you’ll need the services of a broker who knows not just the commercial market, but the sub-sector your business belongs to.
“You need sophisticated advisors to make sure that it makes sense,” Wasserman says. “You need to be sure that the lease payments you're making are reasonable.”
Ah yes, taxes. Not only will capital gains ding you, but you may also have to pay a recapture of capital cost allowance, which is triggered when the proceeds of the sale of depreciable property are higher than the total of the undepreciated capital cost at the start of the year and the capital cost of any additions made during the year, explains Frank Fazzari, managing partner of Fazzari and Partners accountants in Vaughan, Ont.
“So if you've been depreciating it for a long time, and you're going to get a lot more money than what it's on the books for, you're going to be taxed on the depreciation recapture in your income,” Fazzari says.
On the lease
Even though your buyer becomes the happy owner of an appreciating asset with a fixed rental return, Wasserman says you shouldn’t expect to receive too many concessions from your new landlord.
“It's not often a typical landlord-tenant relationship, where you show up at a building, and he says he’ll fix the roof or do this or that to get you in,” he says. “Often, the landlord in this case will say, ‘I'm not paying for anything in this building. I bought the building to accommodate your needs, but that's it. I'm out. Anything that has to be done within the building, that's your problem.’”
There’s also the possibility of your new tenant-landlord relationship not working out. What then?
“You're kind of forced to stay in that facility, unless you're prepared to move and incur significant moving costs,” Fazzari says. “I've seen this often, where you become a tenant, you've lost control, and it forces you, more often than not, to stay where you are because of those costs.”
But a little landlord-tenant tension may be worth it in the long run, especially if your business is in a desirable property.
Wasserman recently worked with a customer whose business, he says, “isn’t making a penny.” She just sold her building for $12 million.
“So she's good to go.”